Correlation Between Anglo American and Arafura Resources

Can any of the company-specific risk be diversified away by investing in both Anglo American and Arafura Resources at the same time? Although using a correlation coefficient on its own may not help to predict future stock returns, this module helps to understand the diversifiable risk of combining Anglo American and Arafura Resources into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Anglo American PLC and Arafura Resources, you can compare the effects of market volatilities on Anglo American and Arafura Resources and check how they will diversify away market risk if combined in the same portfolio for a given time horizon. You can also utilize pair trading strategies of matching a long position in Anglo American with a short position of Arafura Resources. Check out your portfolio center. Please also check ongoing floating volatility patterns of Anglo American and Arafura Resources.

Diversification Opportunities for Anglo American and Arafura Resources

-0.24

Correlation Coefficient

Anglo American  Arafura Resources

Very good diversification

The 3 months correlation between Anglo and Arafura is -0.24. Overlapping area represents the amount of risk that can be diversified away by holding Anglo American PLC and Arafura Resources in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Arafura Resources and Anglo American is a relative statistical measure of the degree to which these equity instruments tend to move together. The correlation coefficient measures the extent to which returns on Anglo American PLC are associated (or correlated) with Arafura Resources. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Arafura Resources has no effect on the direction of Anglo American i.e., Anglo American and Arafura Resources go up and down completely randomly.

Pair Corralation between Anglo American and Arafura Resources

Assuming the 90 days horizon Anglo American is expected to generate 3.55 times less return on investment than Arafura Resources. But when comparing it to its historical volatility, Anglo American PLC is 3.59 times less risky than Arafura Resources. It trades about 0.03 of its potential returns per unit of risk. Arafura Resources is currently generating about 0.03 of returns per unit of risk over similar time horizon. If you would invest  12.00  in Arafura Resources on September 14, 2024 and sell it today you would lose (4.00) from holding Arafura Resources or give up 33.33% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	100.0%
Values	Daily Returns

Anglo American PLC  vs.  Arafura Resources

Anglo American PLC

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Anglo American PLC are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of fairly abnormal basic indicators, Anglo American showed solid returns over the last few months and may actually be approaching a breakup point.

Arafura Resources

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Arafura Resources has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest unsteady performance, the Stock's technical and fundamental indicators remain stable and the current disturbance on Wall Street may also be a sign of long-run gains for the company stockholders.

Pair Trading with Anglo American and Arafura Resources

The main advantage of trading using opposite Anglo American and Arafura Resources positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Anglo American position performs unexpectedly, Arafura Resources can make up some of the losses. Pair trading also minimizes risk from directional movements in the market. For example, if an entire industry or sector drops because of unexpected headlines, the short position in Arafura Resources will offset losses from the drop in Arafura Resources' long position.

The idea behind Anglo American PLC and Arafura Resources pairs trading is to make the combined position market-neutral, meaning the overall market's direction will not affect its win or loss (or potential downside or upside). This can be achieved by designing a pairs trade with two highly correlated stocks or equities that operate in a similar space or sector, making it possible to obtain profits through simple and relatively low-risk investment.

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Note that this page's information should be used as a complementary analysis to find the right mix of equity instruments to add to your existing portfolios or create a brand new portfolio. You can also try the Odds Of Bankruptcy module to get analysis of equity chance of financial distress in the next 2 years.